What is Carta’s New “QSBS tag” For Securities?

Carta QSBS

Members of Carta might see a QSBS badge indicator the next time they log into their account. While new features are always exciting, you might be scratching your head and asking yourself — what does this QSBS tag indicate?

The tag is meant to help shareholders identify if their shares may be eligible for the Qualified Small Business Stock (QSBS) tax exclusion. This feature delineates whether shares are potentially QSBS with a new tagging indicator that marks the shares based on certain criteria. 

What is QSBS?

Qualified Small Business Stock (QSBS) provides for up to a 100% exclusion of Capital Gains taxes. The QSBS regulations are located in Internal Revenue Code (IRC) Section 1202 and include criteria for both the corporation to qualify as a Qualified Small Business and criteria for the investor to determine how much of their gain may be eligible for tax exclusion.

In order for a stock to be eligible, a company must meet certain criteria including:

  • The company must be a domestic C-corporation.
  • The company must have less than $50M in gross assets.
  • The company must be active in a qualified trade.
  • The stock from a qualified company must be directly issued by the company and must be held for 5 years. 

Once these requirements are met, the shareholder can be eligible for favorable taxation in the event of a capital gain. 

Understanding a Company’s Eligibility

Identifying which securities in your portfolio could be QSBS securities is the first step to better QSBS management, and once you’ve identified the potential eligibility, it is crucial to collect and maintain the proper supporting documentation so that you can claim your exemption with confidence.  Carta’s tagging process should alert many people to the potential for their shares to qualify as QSBS, however a deeper level of analysis is best to be confident in claiming the tax exclusion.

Section 1202 has many nuanced complexities that require a deep level of understanding and analysis. Qualified Small Business founders and investors who want to maximize capital tax exemptions while navigating the parameters set forth by Section 1202 in the IRS Tax Code can trust QSBS Expert to manage compliance which is crucial in the case of an audit. Shareholders and their tax advisors must be confident that they can adequately monitor eligibility and maintain supporting documentation.

The CapGains platform is designed to help answer necessary questions to help ensure your shares are indeed QSBS including whether or not the company issuing the stock was a Qualified Small Business at the time of issuance.

Learn more about how the CapGains platform can proactively track and monitor your company’s QSBS and other tax incentive eligibility.

This article does not constitute legal or tax advice. Please consult with your legal or tax advisor with respect to your particular circumstance.

About QSBS Expert

QSBS Expert was founded by a group of entrepreneurs, investors, accountants and lawyers who came together when trying to navigate a QSBS situation of their own. We quickly realized that the regulations left a lot of open questions and the publicly available information was confusing to sift through…so we thought that others may also benefit from having a “go to” resource for all things QSBS.